ACME United Corporation — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and nine months ended September 30, 2014, filed November 14, 2014. ACME United sells cutting devices, measuring instruments, first-aid products, safety products, and related items through its United States, Canada, and Europe segments. Results are seasonal, with stronger sales generally in the second and third quarters due to back-to-school demand.
During the period, the company acquired certain assets of First Aid Only, Inc. for approximately $13.8 million and completed the consolidation of its North Carolina distribution operations into the Rocky Mount facility.
Financial Performance and Position
| Metric | Q3 2014 | Q3 2013 | Change |
|---|---|---|---|
| Net sales | $30.008 million | $22.135 million | 36% increase |
| Gross profit | $10.615 million | $7.940 million | 34% increase |
| Gross margin | 35.4% | 35.9% | Down 0.5 percentage points |
| Operating income | $1.930 million | $1.409 million | 37% increase |
| Net income | $1.189 million | $0.959 million | 24% increase |
| Diluted EPS | $0.34 | $0.29 | Increase |
| Metric | Nine months 2014 | Nine months 2013 | Change |
|---|---|---|---|
| Net sales | $82.555 million | $68.198 million | 21% increase |
| Gross profit | $29.209 million | $24.449 million | 19% increase |
| Gross margin | 35.4% | 35.9% | Down 0.5 percentage points |
| Operating income | $6.289 million | $5.115 million | 23% increase |
| Net income | $4.099 million | $3.479 million | 18% increase |
| Diluted EPS | $1.18 | $1.07 | Increase |
| Operating cash flow | $1.336 million | $3.061 million | 56% decrease |
Q3 operating margin was approximately 6.4%, compared with approximately 6.4% in the prior-year quarter. Nine-month operating margin was approximately 7.6%, compared with approximately 7.5% in 2013. Net income benefited from higher sales, while interest expense and foreign-currency losses increased.
At September 30, 2014, cash and cash equivalents were $5.814 million, compared with $11.644 million at December 31, 2013. Total current assets were $63.121 million and current liabilities were $14.641 million, producing working capital of $48.480 million and a current ratio of 4.31. Accounts receivable were $24.007 million and inventory was $31.461 million.
Long-term debt was $30.344 million, up from $22.912 million at December 31, 2013. The revolving credit facility has a $40 million limit, bears interest at LIBOR plus 1.75%, and matures April 5, 2017. Approximately $9.656 million remained available at September 30, 2014. The company was in compliance with its debt covenants.
Investing cash outflows were $14.571 million for the first nine months, including $13.806 million for the First Aid Only acquisition. Financing activities provided $7.555 million, primarily from net borrowings. Dividends declared were $0.09 per share in Q3 and $0.25 per share for the first nine months.
Material Changes Versus the Prior Comparable Period
- U.S. segment sales increased 41% in Q3 and 26% for the first nine months, driven by first-aid products, Camillus knives, new lawn and garden products, pencil sharpeners, and the First Aid Only acquisition.
- Canada sales increased 23% in Q3 and 12% for the first nine months in U.S. dollars, while Europe sales declined 5% in Q3 and 7% for the first nine months.
- Direct import sales declined to 11% of Q3 sales and 16% of nine-month sales, from 15% and 22%, respectively, in 2013.
- SG&A increased to $8.685 million in Q3 and $22.920 million for the first nine months, primarily from First Aid Only expenses, higher shipping and commissions, personnel costs, and $100,000 of acquisition integration and transaction costs.
- Gross profit included approximately $400,000 of one-time distribution-consolidation costs during the first nine months, partly offset by a $200,000 gain on the sale of the Fremont, North Carolina facility.
- Operating cash flow declined because of a $6.079 million increase in accounts receivable and a $1.895 million increase in inventories, partly offset by higher accrued liabilities and accounts payable.
- First Aid Only contributed approximately $4.4 million of Q3 sales and $6.2 million of nine-month sales; its reported net income contribution was not material.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide specific numerical earnings or revenue guidance. Management stated that expected operating cash flow, together with available credit capacity, should be sufficient to fund planned operations over the next twelve months under current conditions.
Management identified risks related to domestic and global economic conditions, consumer spending, competition and technological change, growth and acquisition integration, and currency fluctuations. European performance weakened, and foreign-currency transactions generated increased losses.
The company recorded a $300,000 environmental remediation liability related to the former Fremont facility. Remediation began in the third quarter and is expected to be completed in the first half of 2015, followed by monitoring expected through 2020. The total remaining environmental remediation accrual was approximately $282,000 at September 30, 2014, including $17,000 for the previously remediated Bridgeport, Connecticut property.
The company donated respiratory masks valued at approximately $115,000 during Q3 to support the Ebola crisis response. It also incurred acquisition-related costs and distribution-consolidation costs noted above. No material legal proceedings were pending, and management concluded that disclosure controls were effective.
Important Facts for Investors to Verify
- Whether First Aid Only achieves expected revenue and operating synergies and how its intangible assets affect future amortization.
- Whether working-capital requirements, particularly receivables and inventory, continue to constrain operating cash flow.
- The company’s ability to reduce leverage while funding acquisitions, capital expenditures, dividends, and operations.
- Compliance with revolving-credit covenants and the April 2017 debt maturity.
- Progress and ultimate cost of Fremont environmental remediation and the required monitoring period.
- Whether European sales and operating losses improve and how currency movements affect reported results.
- The effect of seasonal demand and the absence of formal numerical guidance on full-year results.